Setting the Trade Policy Agenda:
What Roles for Economists?
Kym Anderson
World Bank, University of Adelaide and CEPR
Phone (+1 202) 473 3387
Fax (+1 202) 522 1159
kanderson@worldbank.org
World Bank Policy Research Working Paper 3560, April 2005
The Policy Research Working Paper Series disseminates the findings of work in progress to
encourage the exchange of ideas about development issues. An objective of the series is to get
the findings out quickly, even if the presentations are less than fully polished. The papers
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____________
Prepared for the IATRC Theme Day conference on The Use of Economics in Trade
Negotiations and Disputes, St. Petersburg, Florida, 5 December 2004.
Abstract
Economists have influenced the trade policy agenda for establishing multilateral trade rules,
disciplines and procedures and for negotiating most-favored nation and preferential
reductions in trade barriers and subsidies, in addition to affecting the agenda for unilateral
policy reform. These roles are considered in turn, before focusing on the economists'
contribution though quantifying the extent and effects of existing trade distortions and
alternative reform initiatives. Many trade distortions remain, however, so the paper then
looks at where trade economists' efforts in agenda-setting need to be focused in the years
ahead.
Keywords: trade rules, trade policy reform, cost of protection, empirical modelling of effects
of trade policies
JEL codes: F13, Q17
ii
NON-TECHNICAL SUMMARY
What contribution has the economics profession made in setting the agenda for trade
policy formation and its reform? Cynics would say little, on the grounds that almost every
country still imposes trade barriers even though economists have articulated the virtues of
free trade for more than two centuries. A shorter time horizon gives a more positive picture
though, with substantial reductions in tariffs on most manufactured goods by OECD
countries following their hikes in the 1930s, and the lowering of trade barriers by many
developing countries from the 1980s. This paper examines that post-war period, and then
looks at the scope for strengthening the roles of trade economists.
Economists since the 1930s have contributed to the trade agenda at the multilateral,
regional and national levels. Their constitutional contributions to the multilateral rules and
their exceptions include a tolerance for regional and other preferential trading arrangements.
Most of the action is at the national level though, including in helping governments decide
how to spread their resources between unilateral trade-policy setting and engagement in
preferential and multilateral negotiations for better rules and improved access to markets.
Underlying all of the trade liberalization efforts has been the economists' quantification of
the extent and effects of trade distortions and reform initiatives, both before and after reforms
have been implemented. An extensive examination of that contribution sets the scene for
looking at where trade economists' efforts should be focused in the years ahead. They include
countering the wave of anti-globalization sentiment, improving quantitative analysis of the
effects of trade reforms, and contributing more to the WTO's dispute settlement procedures.
The paper concludes by suggesting more attention needs to be given to the distributional
effects of policy reform, so as to better understand the resistance to it and help design
measures to reduce those forces. It would help too if individual policy analysts built stronger
relationships with policy advisors and their masters.
In terms of the more-immediate goal of influencing the Doha Development Agenda,
the attention of analysts needs to focus on better modelling of the policy instruments to be
used, of the modalities of the negotiations, and of how the net gains from reform will be
distributed within and between countries from multilateral versus regional/preferential
agreements. The latter, and the associated effects on employment, trade flows, inequality,
poverty, and the environment are of much more interest to policy makers than simply net
national or global economic welfare effects. The advocacy skills of members of the
economics profession also matter. And beyond that, timing matters. The right ideas can be
present, the right people can be available to advise a visionary leadership, but pertinent
advice based on sound economic analysis is rarely likely to be a sufficient condition for good
policy outcomes, necessary though it is.
iii
Setting the Trade Policy Agenda:
What Roles for Economists?
Kym Anderson
I. INTRODUCTION
Trade policy economists, no less than any other social scientists, like to think their
research, analysis and advocacy is socially beneficial. Valuing that benefit, and comparing it
with its cost, is not easy (Pardey and Smith 2004), but that is not the purpose of this paper. Its
more-limited objective is to examine what contribution the economics profession has made in
setting the agenda for trade policy formation and its reform at various levels, and what scope
there is for strengthening its roles.
On the face of it, trade economists would appear to be ineffective: the gains from
trade have been well known since Adam Smith's The Wealth of Nations was published 230
years ago ­ yet almost every country still imposes trade barriers. Arguably international trade
barriers are not a lot lower now than they were in the late 19th century (Baldwin and Martin
1999; Bordo, Eichengreen and Irwin 1999). A shorter time horizon gives a more positive
picture though, with substantial reductions in tariffs on most manufactured goods by OECD
countries following their hikes in the 1930s, and the lowering of trade barriers by many
developing countries from the 1980s (after initial rises in the early post-war, post-colonial
years). Attention here is restricted to that shorter post-war period.
Anyone familiar with the history of international trade pr ior to the mid-twentieth
century is acutely aware of its unruliness. Indeed it often took a war between nations before
leaders would get together to agree to desist in disrupting each other's trade. Even then it
would typically be a limited bilateral agreement which, if it hurt other economies, could
exacerbate tensions elsewhere. The historical account of the spice trade from 1553 to 1667 by
Milton (1999) is a reminder of the brutal lawlessness with which international trade was
conducted in centuries past. Certainly trade relations were relatively tranquil in the five
decades to World War I, but they became unruly again in the interwar period with a new
burst of beggar-thy-neighbor protectionism, much of it involving nontariff barriers. One
response was the Ottawa Conference of 1932, but that resulted in preferential tariffs on trade
among members of the British Commonwealth and thereby retained a beggar-thy-neighbour
character. By the end of the 1930s, protectionism was far more entrenched than in the
previous century.
This paper begins by examining how economists since the 1930s have contributed to
the trade agenda at the multilateral, regional and national levels. In the next two sections the
focus is on economists' constitutional contributions to the multilateral rules and their
exceptions ­ which include a tolerance for regional and other preferential trading
arrangements. But it is at the national level where most of the action has been, including in
helping governments decide how to spread their resources between unilateral trade-policy
setting and engagement in preferential and multilateral negotiations for better rules and
improved access to markets. Underlying all of the trade liberalization efforts has been the
economists' quantification of the extent and effects of trade distortions and reform initiatives,
both before and after reforms have been implemented. After an extensive examination of that
contribution, the penultimate section looks at where trade economists' efforts in agenda-
setting should be focused in the years ahead. The final section offers some brief conclusions.
1
II. THE MULTILATERAL AGENDA1
The trade policy instruments that emerged or grew in the 1930s included quantitative
restrictions and prohibitions on trade, exchange controls, and state bureaucracies to
overshadow the market with planning and to monitor financial and merchandise transactions.
And following the Ottawa Conference of 1932, preferential tariffs on trade among members
of the British Commonwealth were imposed, which harmed non-Empire economies.
Out of that inter-war experience came the conviction that a return to the beneficent
noncooperative equilibrium of the nineteenth century was highly unlikely. Instead, leading
economists in Britain and the US were convinced that liberal world trade required a set of
multilaterally agreed rules and binding commitments based on non-discriminatory principles.
A proposal for such an agreement was put to the British War Cabinet by Meade (1942), and
was developed further at the Bretton Woods conference in 1944 (out of which grew also the
IMF and World Bank). In the Anglo-American view, the postwar international economic
system was to be constructed in such a way as to remove the economic causes of friction that
were believed to have been at the origin of the Second World War. An important element in
this vision was the establishment of a stable world economy that would provide all trading
nations with nondiscriminatory access to markets, supplies and investment opportunities.
Economists contributed significantly to the strong perception that there was a positive
correlation between trade and peace, and, more specifically, between nondiscrimination and
good foreign relations.
GATT rules
The efforts in the latter 1940s to create an International Trade Organization (ITO), to
complement the IMF and World Bank, were unsuccessful. The negotiations on the charter of
such an organization, although concluded successfully in Havana in 1948, did not lead to the
establishment of the ITO because the proposed organization was perceived by the US
Congress as taking away too much of its national sovereignty. Nonetheless, many of the key
elements of the ITO proposal were encapsulated in a General Agreement on Tariffs and
Trade (GATT) that was signed by 23 trading countries--12 developed and 11 developing--in
1947 (before the ITO negotiations were concluded). These countries were anxious to pursue
liberalization, and did not want to wait for the conclusion of the ITO talks. They created the
GATT as an interim agreement that embodied many of the draft ITO disciplines. As the ITO
never came into being, the GATT was the only concrete result of post-war efforts to create an
international trade body. It took until the end of the GATT's Uruguay Round to convert that
interim institution into the permanent World Trade Organization (WTO), on 1 January 1995.
One of the fundamental pillars of the rules-based multilateral trading system over
which the GATT and WTO preside is the most-favoured-nation (MFN) clause. This became
enshrined in GATT Article I, as well as in several other WTO Agreements. It is considered
fundamental because it reduces transactions costs in negotiating, and it counteracts
imbalances in negotiating strength. Critics had pointed out that MFN need not lead to a
government being willing to lower tariffs (at least directly), for in its unconditional form it
requires a member to allow the same market access conditions as provided to its most favored
trading partner. Among the early economists to respond to that claim was Viner (1931), who
was writing in the midst of the Great Depression in America where reciprocal trade
agreements or at most ones that contained conditional MFN clauses had been preferred by the
1This section draws on, among others, Anderson and Hoekman (2002, Vols. 2 and 3), Anderson and Josling
(2005) and Hoekman and Ozden (2005).
2
US government. Viner's response was to admit that conditional MFN (each trading partner
gets MFN treatment for its exports only if it reciprocates with a similar degree of greater
market access for US exports) may sound more equitable and involve less free riding than if
only the principal supplying country provides greater market access ­ but then to point out
that it works badly in practice. The reasons, he pointed out, are that conditional MFN
increases the likelihood of trade diversion rather than trade creation; it lowers the tariff
revenue collected in the importing country; and in any case it is equivalent (a) to the
unconditional pledge when received from a country that practices unconditional MFN and (b)
to no pledge at all when received from a country that is also only practicing conditional
MFN.
Another fundamental rule, enshrined in GATT Article II, is that members of WTO
must submit a schedule of `concessions' such as bound tariffs. These legal bindings serve
several purposes: they provide a degree of certainty for traders; they make it difficult and
costly for a member to backslide on the degree of its commitment to openness; and they
provide the `currency' in trade negotiations in which members exchange market access
(Grossman and Helpman 1995, Hillman and Moser 1996). Even if every country had applied
tariffs that were below its bound rates on average, the fact that international product prices
fluctuate means that there are some years in which the bindings bite and so they are welfare
enhancing (Francois and Martin 2004). The reason governments choose to enter trade
negotiations has not generally been well understood by economists though. With their
fixation on efficiency, many thought countries negotiated to overcome the terms-of-trade
externality associated with large countries setting their tariffs unilaterally: by agreeing to each
lower their tariffs, all countries could be better off (Johnson 1953-54, Bagwell and Staiger
1999, 2002). The explanation put forward recently by Ethier (2004) is much closer to what
negotiators say they do, which is to overcome a political externality: by securing market
access abroad for their exporters, they can get more domestic political support from their
export sectors than if they assist them only indirectly (and thereby less obviously) by
unilaterally lowering import barriers.
Despite the slowness to come to this explanation for trade agreements, since the
GATT's inception economists have continued to support the development of the multilateral
trading system's rules, disciplines and procedures (Anderson and Hoekman 2002b, 2005),
and to critique the decisions of GATT Contracting Parties when they allowed exceptions to
the basic rules (Anderson and Hoekman 2002c).
Exceptions to GATT rules
The most egregious exception to GATT rules in terms of sectors relates to
agriculture.2 The most obvious in terms of countries relates to the non-reciprocal trade
preferences and other special and differential treatment of developing countries. And then
there is the tolerance of reciprocal sub-global trade agreements, including bilateral and
regional ones. We consider all but the last of those in this sub-section, and then turn to the
reciprocal preferential agenda in the following section of the paper.
a. Agriculture3
From its inception the GATT has treated agriculture differently from other goods.
Even though the rules were quite appropriate for farm products, exceptions were carved out
2Textiles and clothing were equally sidelined throughout much of the GATT's history (Hamilton 1990). That
sector's economic significance has always been far less than that of agriculture though (Anderson et al. 2001,
Table 1).
3This sub-section draws on the Introduction in Anderson and Josling (2005).
3
for the use of quantitative restrictions (when domestic supply is also restrained) and export
subsidies (with weak imprecation against their use in markets for primary products). Even
this was considered by the US to be inadequate isolation of national agricultural policy from
the constraints of multilaterally agreed trade rules. As a result, an export subsidy waiver was
granted in 1955 that in essence removed even the weak constraints that had been put in place
to that point in time (Dam 1970, Ch. 15).
After a decade of operation the GATT Contracting Parties sought a review of world
trade trends by a top-level panel of independent trade experts chaired by Harvard's Gottfried
Haberler. The Foreword to the panel's report, by the head of the GATT Secretariat, notes that
it was concerns about agriculture in particular that warranted attention. The farm trade section
of the report (Haberler et al. 1958, pp. 80-102) lays out with clarity the problems that faced
the multilateral trading system as a result of agricultural protectionism, and recommended
that "There should be some gradual moderation of the degree of agricultural protection in
exporting and importing countries; that whenever practicable there should be some shift of
the means of protection away from price support and toward deficiency payments systems
..." The report also points out the difficulty of comparing the trade impacts of different types
of policies and called for a way to measure the "degrees of agricultural protectionism
whenever this would be reasonably practicable." This suggestion was to be taken up later by
the FAO and the OECD, as discussed below. Notwithstanding the recommendations of the
Haberler Report, within a couple of years the EEC was to put in place its Common
Agricultural Policy (CAP) that was to increasingly exacerbate the problems identified by
Haberler.
The situation did not improve in the 1960s. There was no shortage of ideas (Richter
1964, Coppock 1966, Warley 1967); what was lacking was a common political will to tackle
the problems. The Kennedy and Tokyo Rounds ended with weak agricultural agreements
based more on the notion of managing world markets (against surpluses in the Kennedy
Round and against shortages in the Tokyo Round) than on liberalizing markets. As Davey
(1993) concludes in his thorough survey of the attempts to discipline farm policies under the
GATT, the rules failed because market access was denied either legally (e.g., through
reliance on waivers) or illegally (e.g., by relying on balance of payments exceptions, ignoring
the rules, or refusing to comply with dispute settlement decisions).
Economists' input into the rules agenda was ratcheted up when the Uruguay Round
offered the prospects of creating a permanent World Trade Organization. That provided
scope to develop new disciplines on agriculture (and on the other goods sector that had been
side-lined under the GATT, namely textiles, plus services).4 The economics profession's
major contribution during the Uruguay Round agricultural negotiations was though ex ante
analysis of the gains that could come from liberalization (see below). Relatively little of their
effort was focused on the modalities of the negotiations which created the complex three-
pillar structure (market access, export subsidies and domestic support) with bindings far
above applied rates ­ a structure that has since been passed on to the Doha agenda.
b. Non-reciprocal trade preferences5
Despite all the fuss about the importance of non-discrimination and the MFN clause,
the multilateral trading system has tolerated non-trivial exceptions to that rule, including non-
4 An Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) also emerged from the
Uruguay Round. Economists had misgivings about TRIPS being part of WTO (Maskus 2000, 2005; Maskus and
Reichman 2004), but were heavily involved during the drafting of GATS rules for services (e.g., Sampson and
Snape 1985) as well as for the Agreement on Agriculture (Josling, Tangermann and Warley 1996).
5This and the next sub-section draw on Hoekman and Ozden (2005).
4
reciprocal tariff preferences and many other forms of special and differential treatment for
developing countries.
Unilateral tariff preferences were sought by Raul Prebish and Hans Singer via
UNCTAD (1964) on behalf of developing countries to assist the expansion of their exports of
manufactures as part of their overall industrialization strategy. Such preferences clash with
not one but two principles of the GATT-based multilateral trade regime: reciprocity (the main
instrument through which free riding is prevented when commitments to lower trade barriers
are made), in addition to non-discrimination (the MFN rule).
From the outset economists questioned whether preferences are an efficient way to
help the developing countries (Patterson 1965). Even in sectors where preferences would
make a difference, they might lead to specialization in products where the beneficiary country
did not have inherent comparative advantage, resulting in socially wasteful investment.
Johnson (1967) identifies a number of additional problems, but notes a critical economic
difference between infant industry protection and preferences: the former is a transfer from
consumers to producers in the developing country, whereas in the latter case the transfer is
from the consumers in the developed country. He notes though that the sectors protected most
in developed countries (agriculture and textiles) are excluded from deep preferences.
Subsequent empirical studies vindicated that early scepticism (Cooper 1972; Murray 1973;
Baldwin and Murray 1977).
Despite these early warnings, the Generalized System of Tariff Preferences (GSP) for
developing countries prevailed, thanks to temporary waivers from 1971 and permanently in
1979 through the so-called Enabling Clause (part of the Tokyo Round set of Agreements).6
One result of the Enabling Clause and the GSP was that developing countries played only a
minor role in the development of the multilateral trading system and in making trade-
liberalizing commitments in GATT negotiations. This was further encouraged when selected
developing countries received even more favourable treatment (e.g., the EU's arrangement
with its former colonies, the so-called ACP countries of Africa, the Caribbean and the
Pacific, again covered by a GATT waiver). With the entry into force of the WTO in 1995,
however, developing countries became subject to most of the disciplines of the many
agreements reached in the Uruguay Round negotiations. This has led to stronger demands for
more effective preferences for poor countries. One response has been the EU's initiative to
extend preferences to UN-designated `least developed countries' (LDCs) by providing duty-
and quota-free access to the EU for their exports of `everything but arms' (EBA). It received
in-principle, best-endeavours endorsement by other OECD countries at the WTO Ministerial
in Doha in November 2001, and several have since adopted a similar policy.
Liberal though the EBA sounds, note that it does not include trade in services (of
which the most important for LDCs would be movement of natural persons, that is, freedom
for LDC laborers to work on temporary visas in high-wage countries). Also, a number of
safeguard provisions are included in addition to the EU's normal anti-dumping measures.
Furthermore, access to three politically sensitive agricultural markets, bananas, rice and
sugar, is being phased in by the EU only gradually over the rest of this decade (and will be
subject to stricter safeguards).
Several other downsides have been pointed out by numerous trade economists. First,
other equally poor but non-LDC/non-ACP developing countries (e.g., Vietnam) are harmed
6During the 1970s the development community also sought to go beyond preference regimes and create a New
International Economic Order (NIEO) that would favour developing countries. In addition to more preferential
market access, they sought measures to reduce price volatility and declines in international primary commodity
markets, increased foreign aid and technology transfers, and a revision of the international monetary system to
finance recurring deficits. Critical assessments of the arguments found that many of the instruments proposed
would be ineffective or counter -productive (Finger and Kreinin 1976, Bhagwati 1977, Corden 1979).
5
by such preferences. This was made abundantly clear in the 1990s during the infamous
dispute-settlement case that was brought to the WTO concerning the EU's banana import
regime. One background study showed that for every dollar of benefit that the banana policy
brought to producers in ACP countries, the regime harmed non-ACP developing country
producers by almost exactly one dollar ­ and in the process harmed EU consumers by
thirteen dollars (Borrell 2004). It is difficult to imagine a more inefficient way of transferring
welfare to poor countries, since at no extra cost EU citizens could have been, through official
development assistance payments, 13 times as effective in helping ACP banana producers
and not hurt non-ACP banana producers at all.7 Such wasteful trade diversion is avoided
under non-discriminatory MFN liberalizations that result from multilateral trade negotiations
under WTO.
Second, the additional production that is encouraged in those LDCs or ACP countries
getting privileged access to the high-priced EU market is not internationally competitive at
current prices ­ otherwise it would have been produced prior to getting that preferential
treatment. Indeed the industry as a whole may not have existed in the LDC/ACP country had
the preference scheme not been introduced. In that case, its profits are likely to be lean
despite the scheme, and would disappear if and when the scheme is dismantled or EU MFN
tariffs are reduced. Efforts to learn the skills needed, and the sunk capital invested in that
industry rather than in ones in which the country has a natural comparative advantage, would
then earn no further rewards.
Third, these preference schemes reduce very substantially the capacity for developing
countries as a group to press for more access to developed country markets. When the 48
LDCs/79 ACP countries have been given such preferences, they become advocates for rather
than against the continuation of MFN tariff peaks for agriculture and textiles ­ diminishing
considerably the number of WTO members negotiating for their reduction. Presumably if
these schemes and the GSP had not been offered in the first place, developing countries
would have negotiated much more vigorously in previous GATT rounds for lower tariffs on
agricultural and other imports to developed countries.
Fourth, because these preferential access schemes have not been reciprocal
agreements (that is, the developing countries are not required to open their markets to
developed countries' exports) they contribute nothing to the removal of the wasteful trade-
restrictive policies of the LDC/ACP countries. This contrasts with market access negotiations
under WTO, which are characterized by reciprocity.
c. Special and differential treatment for DCs
Since most developing countries are late-comers to the multilateral trading system, it
is not surprising that WTO rules and disciplines predominantly reflect the interests of
developed countries (including the permissive provisions for agricultural and textile products,
and the inclusion of services and intellectual property rights in the WTO). To accommodate
developing countries' concerns, the Uruguay Round market access commitments required
smaller percentage tariff cuts and longer transition periods for developing countries,8 while
7The EU is moving by 1 January 2006 to a tariff-only regime for banana imports from non -ACP countries, and
in the process more than trebling its tariff from the current US$75 to a proposed 230 Euros. That will raise the
protective effect of the tariff for ACP countries currently enjoying duty-free access, and yet again harm other
developing countries (Borrell and Bauer 2004).
8The Uruguay Round was sold to developing countries as offering them increased access to goods markets in
developed countries in exchange for disciplines on services and IPRs in developing countries. In the event, both
sets of countries reduced merchandise tariffs on about 30 per cent of their imports, but the average depth of cut
was greater rather than smaller for developing countries (Finger 2001), even if the implementation period was
6
the WTO agreements themselves contain no less than 155 `special and differential treatment'
(SDT) provisions. Also, the 2001 Doha Ministerial Declaration and the Doha Work
Programme of 1 August 2004 emphasize the importance of SDT as an integral part of future
WTO agreements.
Economists have been at pains to point out that slower and lesser protection cut
requirements for developing countries ­ and no cut requirements for least-developed
countries ­ simply reduce the pace at which such economies will develop through integrating
into the global economy. It also ensures, through reciprocity, that developed countries are
inclined (as they were in the Uruguay Round) to give less in the way of increased market
access for developing country export items. As a result, there is the prospect that those
countries currently enjoying preferential access to developed country markets could lose
following a multilateral trade agreement, because of a terms of trade loss due to preference
erosion that cannot be offset by efficiency gains if the LDCs choose not to lower their own
trade barriers. This was less of a problem when GSP programs only involved a preference
rather than duty- and quota-free access: if MFN rates were lowered, it was possible to
maintain a given preference margin by lowering the preferential tariff and/or expanding the
coverage of the scheme, whereas under such duty-free schemes as EBA, any reduction in
MFN tariffs lowers the preference margin.
`New' GATT/WTO issues: trade and environment
There have been a numerous new issues added to the GATT and WTO agendas over
the years, including several by civil society groups (Anderson and Hoekman 2002, Vol. 4).
Some NGOs see trade reform as contributing to the spread of capitalism and in particular of
multinational firms, and believe those aspects of globalization add to innumerable social and
environmental ills in both rich and poor countries (Bhagwati 2004, Wolf 2004). But just as
the traditional economic arguments for protection have been found wanting, so too have the
social and environmental ones both conceptually and empirically. For example, there has not
been a systematic `race to the bottom' in environmental or la bour standards of rich countries
as a result of trade and foreign direct investment growth, and in poor countries foreign
corporations often have among the highest environmental and labour standards (Bhagwati
and Hudec 1996). Nor has trade growth been a major contributor to the stagnation of wages
of unskilled workers in OECD countries (Greenaway and Nelson 2002).
Economists have been influential in urging that such issues do not crowd the
multilateral trade agenda. The effects of trade reform on the environment in particular have
been the focus of much theoretical and empirical economic analysis since the 1970s and
especially in the past dozen or so years (Copland and Taylor 2003; Beghin et al. 2002). While
those analysts acknowledge the environmental effects of trade reform will differ across
sectors and regions of the world, some positive and some negative, there are many examples
where cuts to subsidies and trade barriers would reduce environmental damage (see Irwin
2002, pp. 48-54). For some time the OECD has been encouraging analyses of these
opportunities, and increasingly environmental NGOs are recognising them too, with
Greenpeace currently focusing on energy subsidies, WWF on fisheries subsidies, and IISD
and Friends of the Earth on subsidy reforms more generally. They and the better-informed
development NGOs such as Oxfam seem to be coming to the economists' view that the net
social and environmental benefits from reducing subsidies and at least some trade barriers
may indeed be positive rather than negative, and that the best hope of reducing
longer. Meanwhile, the TRIPS, SPS and Customs Valuation agreements of the Uruguay Round imposed real
resource costs on poor countries relative to the medium-term benefits to them (Finger and Schuler 2001).
7
environmentally harmful subsidies and trade barriers is via the WTO's multi-issue,
multilateral trade negotiations process.
Even if the net effect on the environment was negative nationally or globally,
economists have stressed that that alone would not be a reason to avoid trade reform. Rather,
it should be a stimulus to check that first-best environmental policy measures are in place and
set at the optimal level of intervention, for then we know that the directeconomic gains from
opening to trade would exceed society's evaluation of any extra environmental damage, other
things equal (Corden 1997, Ch. 13; Sampson and Whalley 2005).
Much environmental damage in developing countries is a direct consequence of
poverty (e.g., the slash-and-burn shifting agriculture of landless unemployed squatters). In so
far as trade reform reduces poverty, so it will reduce such damage. More generally, there are
well-observed relationships between per capita income and a wide range of environmental
indicators. Because richer people have a greater demand for a clean environment, income
rises tend to be associated with better environmental outcomes.9 Even though more pollutive
products are being consumed as incomes rise, many abatement practices have been spreading
fast enough to more than compensate. And openness to trade accelerates that spread of
abatement ideas and technologies, making their implementation in developing countries
affordable at ever-earlier stages of development.
III. THE RECIPROCAL PREFERENTIAL AGENDA
Paralleling the development of the multilateral trading system has been the emergence
of a series of regional and other reciprocal preferential trading agreements (RPTAs). Article
XXIV of the GATT permitted this anomaly under certain conditions based on customs union
theory developed by Viner and others, most importantly that such sub-global agreements
among WTO members should involve "substantially all trade". In practice that condition has
not been met, beginning with the most important customs union (the EEC); but of political
necessity that had to be tolerated for Europe and hence has not been challenged for
subsequent RPTAs (Snape 1993). Numerous RPTAs emerged among developing countries in
the 1960s, but most did not come to much and so they received little attention by economists.
Only when Europe began its `1992 Single Market' initiative, and the US moved to join with
first Canada and then Mexico to form NAFTA, did economists return to contribute to this
agenda item. Some economists saw this development as a stepping stone to freer global trade,
others as a stumbling block (Winters 2000). The huge surge of interest in other RPTAs from
the mid-1990s fuelled ever-more theoretical and empirical analysis of the issue, so that by the
early part of this decade there was a much better understanding of the conditions under which
participants and excluded countries would gain or lose (Schiff and Winters 2003).
RPTAs are rarely just a simple sentence such as: there shall be free trade between the
parties.10 On the contrary, they can run to hundreds of pages involving long lists of
exceptions, complex rules of origin and dispute settlement procedures, differing phase-in
9 This is the theme of the recent book by Hollander (2003). For statistical evidence of the extent to which
different environmental indicators first worsen and then improve as incomes rise (sometimes called the
environmental Kuznets curve), see the special issue of the journal Environment and Development Economics ,
Volume 2, Issue 4 in 1997 and the more-recent papers by and cited in Harbaugh, Levinson and Wilson (2002)
and Cole (2003).
10 Such simple agreements do exist, however, as with the Australian Constitution of 1901 which converted
several British colonies into a federation of States. The high tariffs on inter-colonial trade at that time were
abolished in accordance with Section 92 of the new Constitution which declares straightforwardly "there shall
be free trade between states" (Anderson and Garnaut 1987).
8
periods for different products, safeguard mechanisms, requirements to meet the trade
partner's myriad standards, and so on. So complex are such features that it is not uncommon
for firms to pay the MFN tariff rather than do all the paperwork necessary to get duty-free
access within an RPTA. And while they are potentially able to deliver gains to those who join
them, RPTAs do so to some extent at the expense of excluded countries and so they
contribute only a small fraction of the gains that can come from WTO-based multilateral
reform ­ and yet they can involve major diversions of trade from other, lower-cost suppliers,
and of trade negotiator attention away from WTO negotiations.11
Even where the prospects for potential economic gains were shown to be slight, the
politics were such that governments typically were undeterred in their drive to sign on to such
agreements ­ especially in the cases of developing and transition countries negotiating with
the EU or US.
Alongside the development of these PTAs has been a move, proposed by a small
group of economists in the Asia Pacific region, for non-preferential or `open' regional trade
liberalization (Drysdale and Garnaut 1989, 1993; Garnaut 1996). In 1989 that led to the
emergence of the Asia Pacific Economic Cooperation (APEC) forum. After a series of annual
Heads of Government meetings, APEC member countries agreed in 1994, and have since
reiterated that commitment several times, to move to free trade in the Asia Pacific region by
2010 in the case of developed countries and 2020 in the case of developing countries. Even
though there is no legal binding on members to achieve that goal and retain that status beyond
the deadline, the distinguishing feature of this long-term commitment is that, as with WTO
commitments, the market opening is to be provided to all trading partners of each APEC
country (MFN reform) and not just to other APEC members as in a free trade agreement.
That makes it unambiguously a stepping stone to global free trade, albeit no more than a
`best-endeavours', non-binding one.
IV. THE NATIONAL AGENDA
In the absence of a global government, initiatives to negotiate multilateral or
plurilateral/bilateral trade agreements come from national governments. Those governments
also determine their own country's trade policy and its unilateral reform agenda, albeit with
actual or potential international agreements and other aspects of foreign relations in mind. It
is therefore in influencing national governments that economists have their greatest impact.
Most have done so from within their own country or region, especially in the developed
countries. But some have done so via international financial institutions or United Nations
agencies whose mandate is to assist developing countries (including those in transition from
communism).
The economists' influence on national trade policy agendas has come in two key
ways: through promoting a paradigm (this section), and (see next section) through
disseminating results from quantitative analysis (including empirical work aimed at helping
national government's decide on how many resources to allocate to unilateral, preferential
and multilateral trade reform initiatives).
Paradigm promotion in developed countries
11They can also reduce welfare in the partner developed country through trade diversion, as was shown using
CGE analysis as long ago as the 1980s (Brown 1987, 1989a,b).
9
The free trade doctrine has a long history. Irwin (1996, p. 16) quotes an early
statement of it from the fourth century AD by Libanius:
God did not bestow all products upon all parts of the earth, but distributed His gifts over
different regions, to the end that men might cultivate a social relationship because one would
have need of the help of another. And so he called commerce into being. That all men might
be able to have common enjoyment of the fruits of the earth, no matter where produced.
However, numerous groups argued for interventionist policies during the centuries that
followed, including the merchantilists who exaggerated the importance of manufacturing and
the physiocrats who embellished the importance of agriculture. It took until 1776 before
Adam Smith's Wealth of Nations provided a systematic treatise of the laissez faire paradigm,
and a further four decades before David Ricardo published his theory of comparative costs in
1817.
Since then, various arguments for protection have arisen at different times and
depending on the circumstances of particular countries (Irwin 1996, Chs. 7-14). Torrens
pointed out that a unilateral freeing of trade could have an adverse impact on a country's
terms of trade. Mill raised the issue of infant industry protection in the mid-19th century and
it had continued to have some influence until the seminal pape r by Baldwin in 1969. In the
1920s Graham raised the increasing returns argument. Brigden et al. (1929) developed the
`Australian' case for protection, suggesting that the country's European population would
shrink if tariffs on manufactures were cut. EvenKeynes weighed into the argument in 1930,
believing tariffs were necessary to deal with Britain's unemployment in the presence of
downwardly inflexible wages and the government's commitment to retain a fixed exchange
rate. Then in the early 1980s, strategic trade theory suggested intervention might be
warranted in the presence of imperfect competition, although the grounds for such
intervention were soon shown to be rather tenuous. But by and large, most economists
believe that a liberal trade policy is appropriate for developed countries, and that concerns
such as with employment, balance of payments, the environment and so on can best be dealt
with by more-direct policy instruments (Corden 1997).
Paradigm promotion in developing countries
For developing countries (DCs) post-World War II, by contrast, a different paradigm
was proposed as those largely agrarian economies sought independence from their former
colonial masters. Prebisch and Singer developed an import-substitution industrialization
strategy in the early 1960s (UNCTAD 1964), built on the infant industry argument plus a
series of premises: low living standards are the result of dependence on production and
exports of primary products; trade openness would entrench them in that position because
that is their comparative advantage; the low price and income elasticity of demand for
primary products ensures their exports would grow only slowly; their export supply elasticity
in the primary sector is low; and the marginal product of labour in agriculture is near zero.
Not only did many developing countries adopt this strategy (notable exceptions being in East
Asia), but it got recognition in the GATT via special and differential treatment.
Despite its divergence from the conventional free-trade wisdom as applied to
developed countries, the demise of that paradigm as applied to developing (and also
communist) countries was only gradual. The bits of economics that helped were the theory of
domestic distortions from the late 1960s, which showed trade policy was almost never a first-
best way to overcome a domestic divergence (Bhagwati 1971), and the theory and practice of
the rent-seeking behaviour that protectionism bred, which was shown to be hugely wasteful
10
(Krueger 1974). Loan conditionality by international financial institutions, which required
borrowing countries to practice liberal trade policies, probably helped only a little since non-
reforming governments were rarely sanctioned. Probably the biggest influence on other
developing countries' unilate ral decisions to liberalize their trade policies was the spectacular
economic growth performance from the late 1960s of the East Asian economies (including
China from the late 1970s), which adopted an export-oriented trade strategy.
How did development economists get it so wrong? Krueger (1997) suggests one
reason is the misapplication of trade theory: by thinking of the two-factor, two-good trade
model instead of a three-factor, many-good model, the possibility was not envisaged of
economies becoming competitive suppliers of first unskilled labour intensive products and
gradually more capital intensive ones (as in Krueger 1977 and Leamer 1987, building on
Jones 1971). Another reason is that their premises were not based on facts. Schultz (1964),
for example, debunked the premises that farmers are not price responsive and that the
marginal product of farm labour is zero in developing countries; and his later worked stressed
that for economic growth, investments are needed also in human, not just physical, capital. A
third possible reason was the absence until more recently of convincing quantitative policy
analysis to show the cost and other consequences of protectionist policies (see next section).
V. QUANTIFYING TRADE DISTORTIONS AND THEIR EFFECTS12
The international economics profession is no longer in its infancy in terms of
measuring the extent and effects of trade policy distortions, but its rapid progress has only
been recent and it still has some way to go. Extensive reviews of the literature can be found
in Corden (1975) and Feenstra (1995), so all that is attempted here is to provide a sense of the
distance the profession has travelled from a trade policy practitioner's viewpoint since the
1950s.
Measuring the extent of protection
Trade policy distortions can be due to taxes or subsidies on imports or exports, or
quantitative restrictions on trade. Trade can be also distorted by interventions in foreign
exchange markets, and of course by myriad domestic policy interventions such as output,
input and factor taxes and subsidies. But over recent centuries perhaps the most common
trade distortionary measure has been the import tariff.
To measure the extent of a country's aggregate tariff protection against import
competition, attention focused initially on developing tariff level indexes (League of Nations
1927). One of the problems with any aggregate measure, however, is that it cannot serve
equally well all purposes simultaneously. Domestic uses for the index could be as an
indication of the aggregate degree of resource re-allocation towards protected industries
and/or of taxation of consumption of importables, or of foregone welfare gains from trade.
International uses such as by trading partners could be as an indication of the degree of
restriction on import market access.
In terms of indicators of resource re-allocation, substantial progress followed a paper
on Canada's protection by Barber (1955), from which Corden (1963) developed and applied
to Australia the concept of the effective rate of protection (ERP). The distinction between
nominal and effective protection is that the former measures the extent to which the tariff
raises the domestic price of a producer's output whereas the latter indicates the extent to
12This section draws on Anderson (2003a).
11
which the producer's value added is enhanced, taking into account any tariffs on importable
intermediate inputs and the share of the industry's value added in the value of final output.
The ERP concept gained immediate recognition as a practical way of indicating more
appropriately the level of industry protection against import competition not only in
aggregate for a country but also ­ and more importantly ­ between industries within a
country. Its first official use was by the Australian Government with the publication of the
Vernon et al. (1965) report, to which Max Corden contributed; and the first major academic
journal publication with cross-country estimates came out the same year (Balassa 1965). The
next few years saw an avalanche of both theoretical and empirical ERP papers and reports
(see Corden 1971, 1975). The early empirical work includes numerous comparative studies of
both industrial countries (Balassa et al. 1967) and developing countries (Little, Scitovsky and
Scott 1970; Balassa et al. 1971), a testament to its widespread popularity. A striking feature
of this literature is the genuine interaction between theory and empirical work, and between
academic researchers and the policy community including the GATT (see, for example, the
conference proceedings volume edited by Grubel and Johnson 1971).
These studies reveal many things, but four points in particular are worth mentioning.
First, the estimated EPRs far exceed nominal rates of protection (NRPs), suggesting that the
resource pulls and hence costs of protection are much greater than the NRPs on their own
might suggest. Second, the differences between NRPs and ERPs are not constant across
countries, so that ERPs are to be preferred to NRPs for cross-country comparisons of the
extent of protection. Third, while the NRP and ERP rankings of industries within countries
are not greatly different when the degree of aggregation is fairly high, the rank correlation
falls as the degree of disaggregation increases. This means ERPs are also better than NRPs
for across-industry comparisons within a country, since the resource-pull cost of protection
tends to increase with the range of ERPs, particularly within sub-sectors where substitution in
production is high. And fourth, the ERPs expose a non-trivial number of industries where
value added has been negative at international prices even though those activities were
privately profitable because of the height of protection on the final product ­ clearly extreme
cases of resource wastefulness.
The ERP is not relevant, however, as an indicator of the tariff's distortionary effect on
consumption, where simple comparisons of the domestic wholesale price and the border price
are more appropriate. The OECD has developed the latter further to calculate its so-called
consumer subsidy equivalent (CSE) of agricultural policies (taking into account any direct
government subsidies or taxes on consumers of the product concerned in addition to the
tariff), to match its producer subsidy equivalent (PSE) measure.13 While this is useful for
simple comparisons between commodities, it has a similar weakness to the rate of producer
protection concept in that the consumption, trade and economic welfare costs of that
distortion due to the tariff depend not only on the price wedge but also on the own- and cross-
price elasticities of demand, or the elasticities of substitution in consumption. And how any
particular household's spending is affected depends also on the share of expenditure on each
item in the household's consumption bundle.
Useful though the ERP and CSE concepts are, they do not give policy makers and
trade negotiators very reliable indications of the trade and welfare effects of distortionary
policies. Certainly partial and general equilibrium modelling can provide that, as discussed in
the next sub-section, but those models can require a great deal of information and analytical
input that until very recently has not been readily available, particularly in developing
13The PSE attempts to take into account all forms of support to producers, not just the producer price-raising
effect of a tariff on import-competing products. The concept was first developed by Tim Josling for the FAO
(1973, 1975). Recently the OECD altered the name (but not the acronym) to Producer Support Estimate. For
more on its evolution and the methodology behind the concept, see Cahill and Legg (1989-90) and Legg (2003).
12
countries. With that in mind, a single indicator of the trade-distorting and welfare-reducing
effects of price and trade policies was developed in the 1990s for the World Bank, by
Anderson and Neary (1994). Their trade restrictiveness index (TRI) requires somewhat more
computation than just the NRP, but it provides a much more accurate indication of the effects
on trade and welfare than can be guessed from NRP, ERP or PSE/CSE estimates. It suggests
that a more satisfactory approach to measuring trade restrictiveness is to find the uniform
tariff for the two goods that would be equivalent -- in the sense of yielding the same domestic
welfare loss -- to the actual tariffs applied. This welfare-equivalent uniform tariff takes into
account that tariffs on relatively elastic goods are more trade -restrictive than tariffs on
relatively inelastic goods. The only additional pieces of information required to calculate this
simplest of TRIs in addition to the NRP, or PSE and CSE, are the price elasticities of
domestic demand and supply or the excess demand elasticity for each good. 14 Like partial and
general equilibrium modelling, the TRI is more likely to become a supplement to rather than
a substitute for the NRP or PSE/CSE and ERP calculations, as its estimation may involve
relatively little additional work and it still has the virtue of being a single indicator that can be
described in plain words.
The phasing down of bound tariffs since the first GATT round of multilateral trade
negotiations, from above 40 per cent to less than 4 per cent for imports of manufactures by
OECD countries over the past 55 years (Irwin 1995), has reduced dramatically their relative
importance over time. Applied tariffs have fallen even more than the rates bound in
GATT/WTO schedules. Non-tariff trade barriers (NTBs), on the other hand, have been
slower to eradicate, and new NTBs are being added or threatened each year (Laird and Yeats
1990; Baldwin 1991; Laird 1997). Particularly difficult to measure are technical product or
process standards when products are heterogeneous, because domestic-to-border price
comparisons are inadequate when there are not `like' products to compare (see Maskus and
Wilson 2003). Barriers to services trade are even more difficult to measure, although progress
is being made (Findlay and Warren 2000; Stern 2002).
Distortions to exchange rates also affect the domestic price of tradables relative to
nontradables (Corden 1981; Sjaastad and Clements 1982). Drawing on a World Bank multi-
country study of distortions to agricultural incentives, Krueger, Valdes and Schiff (1988)
were able to show that for their sample of 18 developing countries, overvalued exchange
rates have been far more significant anti-agricultural and anti-trade instruments than tariffs,
import quotas, import licensing and other direct forms of assistance or taxation of farm
products combined. Even in Sub-Saharan Africa where direct taxation of agricultural exports
had been huge (averaging 23 per cent in the 1960-84 period), the indirect discrimination
against farming because of overvalued exchange rates was even larger, at 29 per cent on
average for the studied countries of that region. In total those taxation and foreign exchange
policies meant that farmers in that poor continent received less than half the gross earnings of
their exports ­ a huge rate of taxation by any standard.
Measuring the cost of protection
The cost of protection, or more generally of industry assistance/taxation, refers to the
losses imposed by all policy-induced distortions affecting directly the tradables-producing
sectors of the economy. Those distortionary measures could be not only trade taxes or
subsidies but also production or consumption taxes or subsidies on products, on intermediate
inputs, or on factors of production.15 The cost is usually measured against free markets,
14Anderson and Neary (1994) have gone further in showing how it is possible to generate more complex TRIs,
including general equilibrium versions, that are increasingly more satisfactory in terms of their theoretical basis
and internal consistency.
15A comprehensive taxonomy is provided in Bhagwati (1971).
13
including free international trade in final products and intermediate inputs (though not usually
in productive factors). In the absence of distortions and if all factors are perfectly mobile
between sectors, this is the optimal policy setting.16 An alternative perspective is to measure
it against the first-best policy instrument for achieving the particular `non-economic'
objective of society that the tariff is ostensibly targeting (although this is difficult if several
objectives are being targeted simultaneously). An additional literature measures the benefits
of liberalizing markets17, in which case the reform usually is measured against either current
policies or what those policies otherwise would be. The latter is appropriate if, for example,
protection was rising over time and the measurement of its effects was calibrated for a future
year. If the experiment involves bilateral or multilateral reform, any terms of trade changes
associated with other countries' reforms need to be included in the calculus.
Three of the early attempts to measure the cost of protection were for sectors where
rates of protection were very high by international standards: Australian manufacturing
(Brigden et al. 1929), German agriculture (Gerschenkron 1943) and Canadian manufacturing
(Young 1957). In critiquing the Brigden study, Corden (1957) developed what might be
considered the first comprehensive methodology which, with the seminal paper by Johnson
(1960), has provided the foundation for subsequent empirical analysis of the cost of
protection in both partial and general equilibrium.
The cost of tariff protection consists primarily of a production component and a
consumption component (in partial equilibrium the Harberger (1959) deadweight welfare cost
triangles). Such measures are an improvement over earlier calculations that measured just the
cash value of the producer subsidy equivalent or consumer tax equivalent. They usually
ignore the costs of lobbying for and then administering the tariff, and of `leakages' in such
forms as corruption at the customs post and smuggling. The vast majority of empirical studies
also usually assume that perfect competition and constant returns to scale operate, thereby
underestimating the cost of protection in so far as imperfect competition and increasing
returns are present. Nonetheless, this basic approach has been the workhorse of countless
partial equilibrium studies of the cost of protection and, as the popularity of studies such as
those sponsored by the Institute for International Economics shows, they have great appeal to
the policy community. That appeal no doubt is partly because the approach is relatively easy
to explain.
When import quotas or voluntary export restraints (VERs) are used as the protective
instrument instead of a tariff, the costs of a given level of protection are higher. What would
have been the tariff revenue becomes the quota rent which, in the case of VERs, is transferred
to the foreigner. In the numerous cases where large countries are imposing such quantitative
trade barriers, there are also terms of trade effects to consider (as there are also with a tariff).
They can lead to efficiency losses for the exporting countries that more than offset the quota
rent transfer -- as found in several of the US studies of VERs surveyed by Feenstra (1992).
They also lead to extra losses (a) if the quotas are volume based because that measure
encourages the exporting of more-processed or higher-quality products within the product
group for each quota, (b) if the quotas are allocated (rather than auctioned) but not to the
lowest-cost exporting countries, (c) if the licences to fill an exporting country's quota are
allocated (rather than auctioned) but not to the lowest-cost firms in that country, (d) if the
quota leads to additional lobbying, in this case for an allocation of the quota, that erodes the
16However, to the extent trade in factors is complementary with rather than a substitute for trade in products, the
counterfactual should be broadened to include unrestricted factor trade too. Compare, for example, Mundell
(1957) with Markusen (1983); but note that the outcome when both product and factor trade are opened up is not
obvious (Michaely 2003).
17Major efforts to examine the effects of trade liberalizations in developing countries include Bhagwati (1978),
Krueger (1978), and Michaely, Papageorgiou and Choksi (1991).
14
rent transfer, and (e) if the VER encourages inefficient foreign direct investment (FDI) in the
importing country in lieu of exporting the product to that country, or FDI in another (higher-
cost) exporting country. 18
Measuring other economic effects of protection
With the growth in computing power, the economics profession has been able to go
well beyond measuring just the cost of protection. Single-commodity, single-country partial-
equilibrium studies have been supplemented and often superseded by the development of
multi-commodity industry or sectoral models of world markets in partial equilibrium, and
economy-wide single- or multi-country computable general equilibrium (CGE) models.
Agricultural modelling in the 1980s is discussed below as a good example of the former,
before attention turns to CGE developments.
a. Partial equilibrium global modelling: the case of agricultural markets
The impetus to develop global models of agricultural markets came in the early 1980s
as it became clear that agriculture was likely be included in a substantial way in the up-
coming (Uruguay) round of multilateral trade negotiations ­ for the first time since the GATT
began in the late 1940s. The first such model, by Valdes and Zietz (1980), was a direct
application of the Corden/Harberger/Johnson partial equilibrium methodology for a large
number of agricultural products.19 However, each product market was considered
independent of the others (zero cross-price elasticities). A model that took interdependence
into account was developed by Tyers (1984) for grain and meat markets and applied initially
to analyse the European Community's Common Agricultural Policy (Anderson and Tyers
1984). That model was subsequently expanded to include the highly protected sugar and
dairy sectors and became the basis for the empirical work reported in the World Bank's 1986
World Development Report in time for the launch of the Uruguay Round in September that
year (Tyers and Anderson 1986). Meanwhile, several international agencies and the US
Department of Agriculture began building similar models,20 but they were mostly
comparative static and deterministic. By contrast, the Tyers/Anderson model was dynamic
and stochastic, and it also included international-to-domestic price transmission elasticities to
capture the effect of agricultural trade policies in insulating the economy from international
price fluctuations, in addition to their protective effect.21
Even though these models did not distinguish internationally traded products by
country of origin, as proposed by Armington (1969), they were very influential in raising
public awareness during the Uruguay Round of the impact of growth of agricultural
protection levels in the 1980s on farm production, consumption and trade, on the mean and
variance of domestic and international food prices, and on national and global economic
welfare (as measured by equivalent variations in income).
The estimated costs of protection as captured by those models was probably a
reasonable economic welfare measure for advanced industrial countries, because agriculture
is a small part of those economies and the distortions to non-farm tradable sectors is small
18On the relative inefficiency of quotas over tariffs, see Anderson (1988).
19Earlier pioneering studies of a single commodity, sugar, were provided by Snape (1963, 1969).
20They included the USDA's SWOPSIM model (Roningen 1986), IIASA's model (Parikh et al. 1988) and the
OECD's Trade Mandate Model (Huff and Moreddu 1989).
21Full details of the model including the welfare calculus, and its database and protection estimates, are
provided in Tyers and Anderson (1992). A survey of these models is provided in Tongeren, Meijl and Surry
(2001).
15
relative to those for agriculture. For poorer countries, however, agriculture is a much larger
share of GDP and employment, and their industrial and service sectors are often highly
protected from import competition. In such cases, a cut in low levels of agricultural
protection could actually worsen national economic welfare, yet such partial equilibrium
models would suggest there would be an economic gain (Martin 1997, Anderson 2002a).
Also, multilateral agricultural reform is not undertaken in isolation but ­ since the Uruguay
Round at least -- as part of a package of trade reforms affecting all sectors. For these reasons,
partial equilibrium global models began to be superseded from the early 1990s as CGE
models became more disaggregated with the growth in capacity and speed of computers and
in the quality of the needed data. Initial efforts to apply CGE models to agricultural
protection issues are reported in Goldin and Knudsen (1990), but the quality of the models
and applications rose dramatically over the 1990s.
b. Computable general equilibrium (CGE) national and global models
The first CGE models began appearing in the 1970s, and by the early 1980s they
were being used routinely for policy analysis in a number of OECD countries. For example,
building on Evans (1972) pioneering work, the first detailed model build for Australia,
known as ORANI (Dixon et al. 1982), produced results for a wide range of policy issues and
made a major impact on policy debate during the microeconomic reform decade of the 1980s
(Powell and Snape 1993; Anderson 2003b). As noted in the surveys by Shoven and Whalley
(1984) and Robinson (1989), models were also beginning to be built at that time for
developing countries, an early example being Dervis, de Melo and Robinson (1982). Since
then many of these national models have become far more sophisticated, and in particular
have added regional, occupational and household disaggregations and have become dynamic
(as for example in the transforming of the Australian ORANI model into the MONASH
model ­ see Dixon and Rimmer 2002). The latter feature allows forecasting though time and
hence can show paths of adjustment to shocks ­ something about which politicians are
especially anxious.
Global CGE models were slower in coming, since they require so much more data
than national or regional models. Early examples are Whalley (1985) and Deardorff and Stern
(1986, 1990), with the latter having more country and commodity detail. The Australian
Government's Industry Commission also began building a global CGE model for trade
negotiating purposes (the SALTER model ­ see Jomini et al. 1991). A copy of that model
was taken to Purdue University and, since the early 1990s, it has been improving constantly
and been made publicly available as the so-called GTAP model and database (Global Trade
Analysis Project ­ see Hertel 1997). The extraordinary efforts by Tom Hertel to train users
and recruit willing helpers to revise and update the production, trade and protection data and
improve the theory in the model has resulted in hundreds of people becoming persistent users
and thousands of simulation experiments being published since its creation (see
www.gtap.org). That openness, which has been characteristic of some other CGE modelling
groups too, has been a great spur to modelling innovations.
The basic global GTAP model is similar in architecture to the Australian ORANI
model, but more complex versions are being developed all the time. Among the
modifications that have been incorporated for particular applications are scale economies and
imperfect competition (Francois 1998), dynamics through capital accumulation (Francois and
McDonald 1996), and those plus foreign direct investment (Dee, Hanslow and Phamduc
2000). In addition, computational tools for practical policy analysis have been developed to
enable systematic sensitivity analysis (Pearson and Arndt 2000) and decomposition of
economic welfare results (Huff and Hertel 2001). Trade and related policy analysis is now
16
possible for any of the 86 countries or country groups in Version 6 of the GTAP model and
any of its 57 sectors of production (20 agricultural and processed food sectors, 22 other
manufacturing sectors, and 15 services sectors). Since Armington elasticities are included,
bilateral as well as total trade effects can be explored. This enables far more sophisticated
analyses for preferential and multilateral trade negotiations than was possible only a few
years ago.
GTAP is of course not the only such global CGE model, but it is certainly the most
widely used. Others were also used in the ex post analysis of the Uruguay Round (see the
various chapters in Martin and Winters 1996) and are now being used for ex ante analyses of
the current WTO round of trade negotiations and the numerous bilateral and regional free-
trade-area proposals that have become fashionable again in recent years.
Another popular family of models arose from expanding a global macro model by
adding some sectoral detail (McKibbin and Wilcoxen 1995). While having far fewer sectors
and regions than GTAP, and while relying heavily on the GTAP database, the McKibbin
family of models includes capital markets and is dynamic and so is able to generate paths of
adjustment to simulated shocks. As in dynamic national CGE models, the latter feature has
obvious appeal to policymakers concerned with the short to medium term effects of reform
on their constituents.
c. Adjustment costs
The private costs of adjustment for firms and workers to trade reform are paramount
in many people's minds, as reform forces some industries to downsize or close so as to allow
others to expand (Matusz and Tarr 2000; Francois 2003). There are also social costs to
consider, involving social safety net provisions in so far as such schemes are
developed/drawn on by losers from reform (e.g., unemployment payments plus training
grants to build up new skills so displaced workers can earn the same wage as before), and
perhaps increased costs of crime in so far as its incidence rises with transitional
unemployment. Those one -off costs, which need to be weighed against the non-stop flow of
economic benefits from reform, tend to be smaller, the longer the phase-in period or smaller
the tariff or subsidy cut per year (Furusawa and Lai 1999).22 They also appear to be small
relative to the benefits from reform. An early study by Magee (1972) for the United States
estimated the cost of job changes including temporary unemployment to be no more than
one-eighth of the initial benefits from tariff and quota elimination. Even assuming that
transition took as many as five years, he estimated a benefit/cost ratio of 25. A subsequent
study which examined a 50 percent cut in US tariffs (but not quotas) came up with a similar
benefit/cost estimate (Baldwin, Mutti and Richardson 1980). In more recent debates about
trade and labor, analysts have not found a significant link between import expansion and
increased unemployment (see Greenaway and Nelson 2002).
For developing countries also the evidence seems to suggest low costs of adjustment,
not least because trade reform typically causes a growth spurt (Krueger 1983). In a study of
13 liberalization efforts for nine developing countries, Michaely et al. (1991) found only one
example where employment was not higher within a year. A survey of 18 Latin American
countries for the period 1970 to 1996, by Marquez and Pages (1998), found some increases in
short-term unemployment, but mainly in countries where the real exchange rate appreciated
as a result of capital inflows that had accompanied the reforms. That small short-term
22The adjustment required also tends to be small when compared with the changes due to exchange rate
fluctuations, technological improvements, preference shifts and other economic shocks and structural
developments associated with normal economic growth (Anderson et al. 1997; Dixon, Menon and Rimmer
2000).
17
negative effect soon reversed as production became more labour intensive following reform,
according to studies by de Ferranti et al. (2001) for a wide range of Latin American and
Caribbean countries over the 1990s.
d. Tariff revenue effects
A further practical impact of trade policy reform about which concern is often
expressed is the loss of tariff revenue for the government. This is of trivial importance to
developed and upper middle-income countries where trade taxes account for only 1 and 3
percent of government revenue, respectively. For lower middle-income countries that share is
9 percent, and it is more than 20 percent for more than a dozen low-income countries for
which data are available. How concerned should those poorer countries be? The answer
depends on whether/how much that revenue would fall and, if it does fall, on whether/how
much more costly would be the next best alternative means of raising government revenue.
On the first of those two points, government revenue from import taxes will rise
rather than fall with reform if the reform involves replacing, with less-prohibitive tariffs, any
of import quotas or bans, or tariffs that are prohibitive (or nearly so) or which encourage
smuggling or under-invoicing or corruption by customs officials. It is possible even in a
tariff-only regime that lower tariffs lead to a sufficiently higher volume and value of trade
that the aggregate tariff collection rises. Examples of recent trade policy reforms that led to
increased tariff revenue are Chile and Mexico (Bacchetta and Jansen 2003, p. 15) and Kenya
(Glenday 2000).23 Since the economy is enlarged by opening up, income and consumption
tax collections will automatically rise too.
On the second point, about the cost of raising government revenue by other means if
tax revenue does fall, Corden (1997, Ch. 4) makes it clear that in all but the poorest of
countries it will be more rather than less efficient to collect tax revenue in other ways. Even
countries as poor as Cambodia have managed to introduce a value added tax. Hence from a
global viewpoint there is no significant cost that needs to be included in response to this
concern. To the extent subsidies are also cut as part of the reform, the chances of government
revenue rising are even greater. Income and consumption tax revenue also will rise as the
economy expands following reform. In any case CGE modellers typically alter those other
tax rates when trade tax revenues change so as to keep the overall government budget
unchanged.
VI. HOW CAN TRADE ECONOMISTS CONTRIBUTE MORE?
Counter the next wave of calls for government intervention
Despite the convergence of opinion among economists that liberal trade is desirable,
including for developing and transition economies,24 there will always be some who side with
interventionists. The burst of anti-globilization sentiment in the late 1990s led to books such
as Has Globalization Gone Too Far? by Rodrik (1997), and to a questioning within
institutions such as the World Bank of whether `one-size-fits-all' is appropriate when
referring to trade policy.
23See also Greenaway and Milner (1993) and Nash and Takacs (1998).
24In the early 1990s this became known as `the Washington consensus', a term coined by Williamson (1990) to
refer to liberal economic policies. He meant it as a form of description, although it became thought of as a
prescription used by international financial institutions.
18
Books countering those tendencies (e.g, by Bhagwati 2004, Wolf 2004) have since
helped. So too has the recognition that loan conditionality failed to ensure developing country
governments stuck with agreed trade and other reform plans (World Bank 1998) such that aid
and lending institutions are now targeting their funds selectively, rewarding more those
countries with good economic governance (Dollar and Levin 2004). Nonetheless, continual
vigilance by economists is required to scrutinize and respond to new calls for intervention.
More than that, economists need to continue to press for unilateral liberalization and for the
phasing out of important exceptions to the WTO rules aimed at encouraging liberalization
(e.g., a ban on export subsidies, enforcing the requirement that reciprocal preferential trade
agreements involve substantially all trade, the replacement of special and differential
treatment for developing countries and non-reciprocal preferences for the least-developed
with first-best ways of promoting their sustainable development).
Better quantitative analysis
Notwithstanding the enormous progress that has been made in quantitative modelling
in the past two decades, much scope for improvement remains. Theoretical developments
have been running well ahead of empirical modelling, as the Feenstra (1995) survey and the
final six chapters of Francois and Reinert (1997) make clear. Data developments and
parameter estimation have been relatively slow (an international public good problem), as
have efforts to specify well the policy instruments being modelled in both the base and
reform scenarios. We begin with the latter, since it has been a major source of criticism of
Uruguay Round modelling.25
a. Improving the specification of existing and alternative policy measures
Several mis-specifications of policy measures are clear from the ex post and
especially the ex ante modelling of Uruguay Round (UR) reforms. First, UR (as with past
GATT and future WTO) commitments relate to reductions in bound tariff rates, not applied
rates, and bound rates can be higher (in agriculture's case often several times higher) than
applied rates. Yet many modellers used applied rates in calibrating their models and then
reduced them by the extent of the promised bound tariff cuts, thereby overstating the
magnitude of reform ­ in some cases by a huge margin, given the dirty agricultural
tariffication that occurred. Recent concerted efforts by GTAP consortium member institutions
and others have ensured both sets of tariffs are available from late 2004. Care is also needed
in specifying reform options when non-linear tariff and subsidy cuts are to be implemented
(Francois and Martin 2003, Jean, Laborde and Martin 2005)
Second, a wide array of tariff preferences operate for various groups of developing
country exporters and among members of preferential-trade areas. In the past these have been
ignored by most modellers, because such data have not been available in a form that they
could readily use. That too has been rectified with the Version 6 GTAP data base. The
expansion in the number of LDCs separately represented in the GTAP data base also aids
quantitative analysis of this sensitive issue.
Third, it is in agriculture where most of the remaining gains from goods trade
liberalization are to be found. 26 Reforming that sector should have been straightforward
25Criticism has come even from within the international economics profession. See, for example, Panagariya
(1999).
26According to GTAP modelling results reported in Anderson et al. (2001) using Version 5 of the GTAP
database, fully two-thirds of the gains from eliminating all merchandise import barriers globally in 2005, after
19
following the promised tariffication of many nontariff agricultural trade barriers following
the UR, but such is not the case. The reason is that governments agreed to allow countries to
set their bound tariff at excessively high levels so long as they promised at least existing
levels of imports to come in at low tariffs. That triggered the use of so-called tariff rate quotas
(TRQs). TRQs add considerable complexity to modelling empirically even the domestic
impacts of agricultural trade policies and their reform, let alone their trade effects. Again,
they are better handled in the new Version 6 GTAP database.
Fourth, an additional complication for modelling agriculture is that many countries
impose quarantine restrictions and even bans on imports of farm products. Hence even if the
bound rates and TRQs had been correctly modelled, the results may still overstate what
would actually happen following tariff cuts and TRQ expansions if those quarantine
restrictions begin to bite. It will be a long time before we have a comprehensive usable data
base showing the extent of protection afforded by these and other technical barriers to trade,
even though such barriers may be even larger than that due to the bound tariff on numerous
farm products. This problem will escalate as and when food safety process standards (e.g., for
GMOs) become more widespread, since the concept of `like product' will come under
challenge. Similar protective effects result from technical barriers to trade on non-farm
products (Baldwin 2001). The Uruguay Round's Sanitary and Phytosanitary Agreement and
Technical Barriers to Trade Agreement have only gone a small way towards disciplining the
abuse of these forms of trade protection.
Fifth, safeguards may be applied under certain circumstances such as import surges.
That may well be how the US and/or EU respond when the present voluntary export restraints
on textile and clothing trade are removed under the UR Agreement on Textiles and Clothing
at the end of 2004 (or a few years later for China and possibly other WTO accedants such as
Vietnam). That possibility has to be kept in mind when modelling manufacturing
liberalizations.
Sixth, most models have ignored or at best captured only very crudely the distortions
to services trade and investment flows. Those barriers are considerable, but are difficult to
measure and represent in standard CGE models (see Hoekman 1996; Findlay and Warren
2000; Dee et al. 2000; Stern 2002; Whalley 2003; Winters et al. 2003). Yet when those
distortions are not included, there is the same problem with interpreting the welfare effects of
goods trade reform generated by a CGE model as there is from a partial equilibrium model of
a subset of markets in the presence of distortions in other markets of that economy. That is, if
services distortions greatly exceed goods protection then decreasing the latter could worsen
national economic welfare even though a CGE model which specifies zero distortions for
services markets will suggest a welfare gain from a goods protection cut. The only solution to
this problem is to continue to build on the pioneering work reported in Findlay and Warren
(2000) on measuring the extent of distortions to markets for services and that of Jensen,
Rutherford and Tarr (2004) and others in incorporating those measures into CGE models.
Seventh, most modellers assume the counterfactual is the status quo, when in fact it
could be rising protectionism. In the latter case, traditional measures of the gains from reform
will underestimate the benefits that could flow. To suggest the most likely alternative path
requires a fuller understanding of the political economy forces at work that analysts normally
have, however.
Finally, modellers also often fail to compare the adjustment required because of
policy reform with that required per year in the course of normal structural changes that
accompany economic growth. Such a comparison typically reveals that trade reform causes
full implementation of Uruguay Round commitments, would come from agriculture. New results using Version
6 suggest a slightly lower but still massive share (Hertel and Keeney 2005).
20
very little structural adjustment per year compared with the myriad other forces at work in the
economy (Anderson et al. 1997, Dixon, Menon and Rimmer 2000).
b. Effects of trade reform in the presence of other domestic divergences
In addition to services markets being distorted at the border (e.g., barriers to foreign
direct investment and immigration), many other domestic markets are typically distorted by
government policies (including myriad domestic taxes and price-cap regulations on privatized
utilities), or arrangements between labour unions and management). Ideally those policy
instruments and distortions should all be specified in each model, but that is a formidable
task. In the meantime, in describing model outputs there should always be the caveat that the
results are exaggerated to the extent that there are domestic impediments to actual market
adjustments to reduced trade barriers.
As well, there may be divergences (to use Corden's (1997) term) in the form of
environmental or social concerns that the government has not optimally addressed. That too
can lead to smaller actual social welfare gains than our economic models might suggest, or
even to losses, from trade liberalization (e.g., if there is a sufficiently large and uncorrected
negative environmental externality associated with producing more exportables). Proponents
of the idea that agriculture is `multifunctional', and for that reason deserves government
support, try to make that claim (Anderson 1998). Distinguishing between genuine widespread
environmental or social concerns, and the claims of self-serving vested interests, is not
always easy in practice.
c. Imperfect competition and scale economies
A more-widespread incorporation in CGE models of imperfect competition and scale
economies (following the example set by modellers of the European Union's Single Market
in the 1990s) would accelerate if we had better empirical estimates of the mark-ups firms
impose and the extent of economies of scale in different industries. These modifications are
especially crucial for the services sector, as is the incorporation of foreign direct investment
flows. Hence the more these models are going to be used to analyse services policy reforms,
the more important are those inclusions. Also needed are better data on services trade and
better specifications of services policy measures, particularly if the GTAP database (which
many other non-GTAP global modellers also depend on) is to be disaggregated beyond the 15
services sectors in the current Version 6.
d. Asset values and dynamics of trade liberalization
Including capital accumulation and thereby making global CGE models dynamic is a
tall order (see, e.g., Grossman and Helpman 1991), but it would open up opportunities to
address additional issues. One is the intergenerational transfers that could result from tariff
reforms affecting asset values. Those effects would depend on any terms of trade changes and
hence are affected by whether a small economy's liberalization is unilateral or part of a
multilateral reform package. Another issue such a model could handle better than present
ones is selective temporary protection (of which anti-dumping is perhaps the most notorious).
A third issue, and one that is important for poorer countries, is the greater scope there would
be to assess ways of accommodating the revenue consequences of tariff changes, including
via debt financing (Keuschnigg and Kohler 1997). And forth, estimates of the costs of
adjustment over time could be more-easily incorporated.
21
But perhaps the most important contribution that dynamic models could make is to
show how much greater are the gains from trade liberalization than is apparent from
comparative static models, and how little are the adjustments needed because of trade reform
relative to those due to the normal pace of structural changes that accompany economic
growth.
e. Effects on factor markets and especially wages and employment
The evident concern about the possibility that trade reform could have adverse
impacts on wages and/or employment for lower-skilled workers in developed countries
attracted considerable interest of analysts in the latter 1990s (see Greenaway and Nelson
2001) but less interest from empirical CGE modellers than one might expect eve n though in
principle CGE models are well served to provide insights. The problem in practice is that the
factor market assumptions used by many modellers are often rather simplistic (and horrify
labour economists): full employment before and after the policy shock, a perfectly inelastic
supply curve for labour, few if any skill differentials or sector-specific skills, costless
adjustment to shocks, and often no minimum wages or any other factor market distortions.
Parading factor market results would require exposing those assumptions (and those assumed
for land and capital markets). Clearly these factor market issues should be being dealt with
for the sake of getting better trade and welfare results anyway, so if greater demands for such
modelling results lead to more-realistic specifications of factor and especially labour markets,
that will be a doubly good thing.
In many people's eyes the private and social costs of adjustment for firms and
households to trade reform are paramount. Those one-off costs need to be weighed against
the non-stop flow of economic benefits from reform, even if they tend to be small when there
are long phase-in periods or small tariff or subsidy cut per year. Even so, they are of great
significance to communities and hence to politicians, and estimates for them have been
provided much less than have estimates of the gross benefits from reform.
f. Effects on household and regional income disparities and poverty alleviation
The Seattle debacle in late 1999 and the protests at numerous global economic
leaders' meetings since then make clear that there is a strong demand for empirical modellers
to say something also about the impact of shocks such as trade policy reform on the
distribution of incomes across households and regions within each country, and in particular
on the incidence of poverty, especially in poorer countries. That requires going beyond
calculating just factorial income distributional effects. It requires including utility and
earnings functions for several instead of just a single household. Inputs into that specification
could be household survey data for urban and rural areas, from which it may be possible to
estimate the shares of different (say) quintiles or deciles of households' incomes from
different productive factors and from government transfers net of taxes, and the shares of
their expenditure on different products.27
g. Effects of domestic policy responses to trade reform
Having identified the gainers and any losers from a trade policy change, one could
draw on our understanding of the political economy of economic policy formation to
27Early examples of modelling exercises along these lines are Friedman (2000), Hertel et al. (2002) and
Bhattasali, Li and Martin (2004). Hertel and Winters (2005) will report the results from a multi-country World
Bank research project along similar lines, focusing on the poverty effects of a likely Doha Round outcome.
22
anticipate what additional policy changes might be forthcoming in response to the trade
liberalization. Those responses could then also be modelled.
At the same time, the likely effects of other potential domestic policy changes that
might be needed to meet society's economic, social and environmental objectives could be
presented alongside results for the trade reform, to show how any adverse effects from that
reform might be most-efficiently dealt with. This step may be very important if the results of
the ex ante trade reform simulation are seen as politically unpalatable, because otherwise the
government may choose simply to abandon its trade reform plan.
Contribute more to dispute settlement procedures
The Uruguay Round included an agreement to greatly strengthen the GATT's dispute
settlement procedures. While economists were not instrumental in its establishment, they
have begun to join with lawyers in being involved as WTO Dispute Settlement Panelists, and
in critiquing its procedures, including those involving remedies (Anderson 2002b). A
particularly unfortunate development has been the tendency in difficult cases for the
Respondent to refuse to alter an offending measure found to be inconsistent with the
member's obligations. Retaliation has been authorized in such cases, typically involving the
Complainant imposing restrictions on imports from the Respondent and so moving the world
away from rather than towards freer trade. Bagwell, Mavroidis and Staiger (2003) have
suggested one possible solution to this problem (allow WTO members to bid for the right to
retaliate against a Respondent who is unwilling to reform), but more analysis and debate in
this area could have a high payoff.
VII. CONCLUSIONS
Clearly, while trade policy theorists and empirical trade modellers within the
international economics profession have come a long way since the late 1950s, plenty of
exciting challenges remain for those interested in having an impact on the real world of trade
policy reform. If economists are to be any more influential in the trade policy arena, however,
they need to understand better why governments intervene in markets the way they do, for as
Stigler (1975, p. xi) says, `Until we understand why our society adopts its policies, we will be
poorly equipped to give useful advice on how to change those policies'. Theoretical progress
has been made in recent years using new political economy insights (see Grossman and
Helpman 2001, 2002); and the availability of CGE models (especially if they are embellished
with household data so that distributional effects can be explored, as in Hertel and Winters
2005) makes it easier to address empirical such questions as why some industries or sectors
are assisted or taxed more than others and why and how the pattern of industry assistance
changes in the course of economic development or in response to major shocks. But there is
no substitute for individual policy analysts building stronger relationships with policy
advisors and their masters. Indeed trade policy advisors, whose behind-the-scene activities
put into practice what they have learnt from the research community, are the ones who
deserve much of the praise for actual reform.28
Better empirical ex ante measures of the likely effects of trade reform will add
transparency to the process. In the case of the Doha Development Agenda, the attention of
analysts needs to focus on better modelling of the policy instruments to be used, of the
28See Harberger (1993). One recent and dramatic example, reported in detail by Mallaby (2004), is the role of a
single bureaucrat (now head of the central bank) in the wholesale reforming of economic policy in Uganda in
the 1990s.
23
modalities of the negotiations (e.g., which formulae are to be used for cuts to tariff and
subsidy bindings as distinct from applied rates),29 and of how the net gains from reform will
be distributed within and between countries from multilateral versus regional/preferential
agreements. The latter, and the associated effects on employment, trade flows, inequality,
poverty, and the environment are of much more interest to policy makers than simply net
national or global economic welfare effects.
The advocacy skills of members of the economics profession also matter. Vested
interest groups seeking protection specialize in advocacy skills, so equally skilled advocates
for liberal markets need to be active in political markets if protection increases are to be
avoided. While public interest groups and think tanks seek to provide such services, a
persistent problem is that academics get rewarded far more for success in publishing in
quality journals than for having a policy impact though effective advocacy.
Beyond that, timing matters. The right ideas can be present, the right people can be
available to advise a visionary leadership, but politicians may require a crisis or a strong
mandate to act.30 The Second World War following the Depression of the 1930s stimulated
the signing of the GATT in the latter 1940s. Likewise, the atmosphere following September
11, 2001 made it possible for WTO members to agree to launch the Doha round of
multilateral trade negotiations in November that year, in contrast to the experience at the
Seattle meeting of trade ministers two years earlier when such an attempt failed spectacularly
in the wake of anti-WTO protests. In between those episodes, the farm export subsidies war
and its impact in depressing international food prices was what triggered the launch of the
Uruguay Round in 1986 and the success of keeping agriculture high on its agenda, in contrast
to all previous GATT rounds. So pertinent advice based on sound economic analysis is not
sufficient for good policy outcomes ­ but it is a necessary condition, so having the analysis
ready for those serendipitous moments in history will ensure the economics profession earns
its keep.
29See, for example, the careful analysis by Jean, Laborde and Martin (2005).
30For an attempt to test 15 hypotheses about national policy reform, see Williamson (1994). Few of the
hypotheses were supported by the case studies examined. Rodrik (1996) also concludes that clear lessons are
difficult to draw. One reason is the uncertainty of reform outcomes. As Fernandez and Rodrik (1991) point out,
when a voter is uncertain as to whether she/he will be among the minority of losers from a policy change, the
status quo will be preferred even when the majority know they will each gain more than those in the minority
will each lose.
24
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